Colleges Lose Pricing Power

By

Michael Corkery

Updated Jan. 9, 2013 7:26 p.m. ET

The demand for four-year college degrees is softening, the result of a perfect storm of economic and demographic forces that is sapping pricing power at a growing number of U.S. colleges and universities, according to a new survey by Moody's Investors Service.

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Students at the University of Washington in Seattle. Gov. Chris Gregoire wants the Legislature to give college parents a break during the next two years by freezing tuition, but officials at Washington's universities say that won't help them solve their budget problems.
Associated Press

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Facing stagnant family income, shaky job prospects for graduates and a smaller pool of high-school graduates, more schools are reining in tuition increases and giving out larger scholarships to attract students, Moody's concluded in a report set to be released Thursday.

But the strategy is eating into net tuition revenue, which is the revenue that colleges collect from tuition minus scholarships and other aid. College officials said they need to increase net tuition revenue to keep up with rising expenses that include faculty benefits and salaries. But one-third of the 292 schools that responded to Moody's survey anticipate that net revenue will climb in the current fiscal year by less than inflation.

For the fiscal year, which for most schools ends this June, 18% of 165 private universities and 15% of 127 public universities project a decline in net tuition revenue. That is a sharp rise from the estimated declines among 10% of the 152 private schools and 4% of the 105 public schools in fiscal 2012.

The financial pressures signal that many schools are starting to capitulate to complaints that college has become unaffordable to many American families, observers say. At least two dozen private colleges froze tuition this fall, roughly double the previous year's total.

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"It's pretty clear that pricing power of colleges has reached an inflection point," said John Nelson, a managing director at Moody's who oversaw the survey team.

For colleges, the declines in net revenue could portend cuts to academic programs and a search for alternative sources of revenue such as more online courses and recruiting wealthy students from overseas who can pay full tuition.

Many smaller private schools that depend heavily on tuition revenue are under particular pressure. But even some public universities that have had success raising tuition recently told Moody's that it will be increasingly hard to keep doing so. Highly selective and highly rated colleges still experience "healthy student demand,'' according to Moody's, and many have large endowments that can help pay for scholarships and boost revenue.

Wittenberg University, a roughly 1,730-student school in Springfield, Ohio, froze tuition at $37,230 for the 2013-14 academic year in an effort to make the private college more affordable. The school is also reviewing academic departments to make sure it is offering programs that have the greatest demand from students.

"If colleges do not adapt to shifting demographics and the weak economy making families more price sensitive, there will be fewer institutions," Wittenberg President Laurie Joyner said in an interview.

Nearly half of the schools surveyed by Moody's reported enrollment declines this fall, though overall median enrollment remained relatively flat from the previous year. A stagnant high-school graduate population, particularly in the Northeast and Midwest, is contributing to the declines at some schools.

Moody's also attributed the enrollment decline at some public universities to a "heightened scrutiny of the value of higher education" after years of tuition increases and stagnating family income. The credit-rating firm said in its report that more students are "increasingly attending more affordable community colleges, studying part time, or electing to enter the workforce without the benefit of a college education."

Private universities and colleges with lower credit ratings, as well as smaller public universities, reported the most enrollment pressure, according to Moody's.

"We have a more informed class of college consumers," said Bonnie Snyder, founder of Kerrigan College Planning in Lancaster, Pa. "Everyone today knows someone who went to college and ended up with a career that didn't justify the cost. They see college as a more risky investment."

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